Are Retirement Planners Whistling Past the Graveyard?

Written on:March 27, 2015
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The retirement situation is changing so rapidly that it’s not realistic to continue practicing retirement planning like advisers did a few years ago. The new political and investment reality is leaving most financial pros in the dust. Their clients know more about these basic changes than the professionals.

The demise of retirement security has been rapidly accelerating in the past few decades and the latest news verifies that a post-working life is going to be a financial strain for millions of Americans.

In the interim, all the investment planning, asset allocation, risk tolerance measures, behavioral finance explanations and  incessant Fed watching should all be put into perspective:  serious shortfalls into retirement savings and retirement income, combined with the steady decrease in pension contributions, repeated attempts to roll back Social Security and Medicare benefits, anti-worker “free-trade” agreements that export jobs, and the slow recovery in housing wealth all point towards a lower standard of living in retirement for millions of Americans.

Of course, this is an unpopular and anti-patriotic political and investment message. And while the majority of Americans cannot articulate the exact reasons for their financial stagnation after decades of working, they intuitively know that something is amiss with the American Dream.

That explains why politicians jockeying for president ignore the topic and why seated politicians and most in the corporate financial media (FOX and CNBC) intentionally look for other distractions, such as obsessing about the Fed’s upcoming rate hikes, to avoid discussing this critical domestic issue.

This also indicates a serious problem with the way financial planning is practiced today.  I bet the vast majority of planners and advisers never mention the long-term impacts of these combined events, accompanied by the emergence of a political party whose stated public intent is to roll back financial supports (except for the largest corporations) and actively work to increase the wealth gap.  All of this means a more structurally weaker retirement system.

Real incomes, 2014
Real incomes, 2014

Yet all of these political and economic realities which play out weekly in the financial press never enter into the conversations with most planners and their clients.  Instead, when I meet with my adviser, we talk about market volatility and ways to increase income via dividends and ETF funds.  I bet he never mentions the recent Council of Economic Advisors report that found that the cost to investors who buy funds that are “suitable,” but come with high fees that cost uninformed investors $17 billion every year.

In short, like the admonition never to discuss religion and politics with strangers, financial advisers and planners intentionally avoid the most important topics affecting future decades in retirement because it is not politically correct, yet it is essential if professionals want to give their less-informed clients honest answers.  This is something which should change in the interests of providing honest advice accompanied with a new interest in sparking political activism, so individuals can become more politically involved in order to protect their own interests.  After all, isn’t that what politics is all about?

The Sad Facts

Past and current studies overwhelmingly point out the deficiencies in retirement.  This is in spite of popular, but ineffective, industry measures, such as 401(k) participant education, increasing emotional intelligence, saving more, and target-date funds that are widely touted as being effective and changing participants behaviors, but fall well short of bridging the financial gap that only widens in retirement.  These popular admonitions may create work for those in the retirement and investment industries, but they won’t solve the larger problem for their own clients.

Let’s take a look at public pensions, which are largely awarded to union workers.  A 2011 report from the American Enterprise Institute for Public Policy Research found that states said their “public-employee pensions are underfunded by a total of $438 billion, but a more accurate accounting demonstrates that they are actually underfunded by over $3 trillion. The accounting methods that states currently use to measure their liabilities assumes plans can earn high investment returns without risk.

Risk has been shifted from professionally-managed pensions to uninformed individuals.

Risk has been shifted from professionally-managed pensions to uninformed individuals.

Flash Forward to 2015

According to a CNBC analysis of financial data for 150 state and local pension plans collected by Boston College’s research center found that 91 had set aside less than 80% of the money needed to meet current and future obligations to retirees. Only six were fully funded.

This has been accompanied by a serious decline in the number of people covered by state and local pensions.  In 1975, some 88% of private sector workers and 98% of state and local sector workers were covered by defined benefit plans, according to a 2007 report by the researchers at the Center for Retirement Research at Boston College. By 2011, fewer than 1 in 5 private industry employees were covered by a pension that paid a guaranteed monthly check, according to the Labor Department.

As for average citizens, a 2013 report by the Economic Policy Institute found that too many younger, Black, Hispanic and less-educated people are facing a very dire old age.

The authors of this report found that while the retirement savings of middle-aged and older households have generally grown, those of younger households have stayed flat or declined in recent years. Gen Xers who were between age 38 and 43 in 2010 had $5,000 less in savings than their counterparts in 2004. The authors also found that seniors’ pension benefits have peaked while earnings have increased. Within the age range of 62 to 79, many of the youngest are still working.

Retirement savings were unequally distributed based on household incomes. Only 52% of middle-income households had retirement savings in 2010. The median balance in these accounts was found to be much lower than the mean ($23,000), reflecting “an unequal distribution of retirement savings even for middle-income households with positive balances,” said the authors Monique Morrissey and Natalie Sabadish.

African American and Hispanic workers used to have participation rates on a par with white workers, but this rate has lagged in recent years, the authors said. Racial and ethnic differences in retirement saving and wealth were found to be even larger than differences in participation. White households were found to have more than six times as much saved for retirement as Hispanic and African American households.

The research also showed gaps in retirement preparedness and outcomes between college-educated workers and those without a college degree have widened over the last two decades. College-educated households were found to have nearly six times as much saved than high school educated households.

Predatory Practices Continue

The pace of class action lawsuits, some being heard by the U.S. Supreme Court on excessive fees and revenue sharing, is also accelerating.

The latest is a settlement from Ameriprise Financial in which the investment firm agreed to pay $27.5 million to settle a class-action lawsuit that alleged it broke its fiduciary duty to about 24,000 current and former participants in its own retirement plan. Nor is this anything new at Ameriprise.  In 2012, a judge refused to dismiss the lawsuit, which included accusations that Ameriprise had loaded up the company 401(k) plan with expensive, underperforming mutual funds and was charging employees excessive fees, according to ThinkAdviser.

The Bottom Line

As the wealth gap continues, the gap between the have and have-nots will widen.  Republican attempts to reduce Social Security, Medicare and Medicaid benefits have been introduced in the current budget proposal.  Attempts to privatize Social Security will continue, so mutual fund and insurance companies can continue to generate high fees.

So as presidential aspirants talk about the nation’s future, they should mention that a financially secure retirement, accompanied by the pursuit of their former standard of living while they were working, is about as remote as moon travel for the average American in the decades ahead. That’s politically unpalatable, but the vast majority of Americans know it already.

Maybe that’s why the latest studies from the U.S Department of Education show that that only 40% of students who entered college and were high school seniors in 2004 and whose families earned between $46,000 and $99,000 had earned bachelor’s degrees by 2012, according to the first measure. This compares to a graduation rate of 63% for those from the top of the income ladder, and 28% and 20% for moderate- and lower-income students, respectively. The second measure used by the agency found that looks at all dependent students who started college in 2003 from families with incomes between $60,000 and $92,000, found that only 45% had earned a bachelor’s by 2009.

What’s happening?  Maybe a new interpretation of the American Dream is in the works.

 

 

 

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